State govt borrowing turns expensive after RBI's repo rate hike

Much less raised than the indicated Rs 16,800 crore

The yields on state development bonds at Tuesday’s auction -- the first after the Reserve Bank of India’s half a percentage point increase in the repo rate to 4.90 per cent -- hardened further by five-six basis points across maturities.

However, the extent of the increase in yields at the auction was low compared to the nine basis point rise in the cut-off yields at an auction held last week. Three states raised Rs 5,000 crore — Andhra Pradesh (Rs 2,000 crore), Haryana (Rs 2,000 crore), and Tamil Nadu (Rs 1,000 crore) —through such bonds. This amount (Rs 5,000 crore) raised is much less than the Rs 16,800 crore given in the indicative calendar and also lower than the Rs 12,000 crore that four states raised last week, according to rating agency ICRA.

According to the Reserve Bank of India data, the cut-off yield for 10-year paper was 7.94/95 per cent as against 7.89 per cent last week. For 19/20-year paper, it was 8.04 per cent, up from the 7.99 per cent last week. The benchmark 10-year Government of India security (G-sec; 6:54 GS 2032) yield rose to 7.58 per cent on Tuesday from 7.52 per cent last Tuesday (June 7, 2022), led by a surge in crude oil prices, US Treasury yields, a weaker rupee, and apprehensions of a rise in domestic inflation, ICRA said. 

The weighted average cut-off of the 10-year bond increased by five basis points to 7.95 per cent today from last Tuesday. Accordingly, the spread between the weighted average 10-year bond and 10-year government bond yield declined mildly to 36 basis points on June 14 from 37 basis points last week. 

The spreads had inched up from 33 basis points (May 17, 2022) to 36 basis points (May 24, 2022) and further to 40 basis points (May 31, 2022).

State governments and Union Territories have borrowed Rs 842 billion to date in Q1 FY23. On a year-on-year basis, the borrowings are 19.3 per cent lower than the year-ago level (Rs 1,044 billion), ICRA added.